Issue#: 522/2019

Spot values at a glance:







Daily Observations:

Stocks in Asia were mixed Tuesday as investors look to a deluge of earnings for reasons to carry an equity rally further. Oil cemented a rally after the White House said it will scrap waivers that allow the purchase of some Iranian crude. The dollar was steady.. Traders will look to a week full of corporate earnings releases, in particular from the technology sector. Investors will also turn their focus to the US economy, with first quarter gross domestic product data due on Friday.


US Expected to Eliminate Oil Waivers:

Bloomberg news reported earlier today that the Trump administration won’t renew the waivers that let countries buy Iranian crude oil without facing US sanctions, according to 4 people familiar with the matter, a move that could roil energy markets and risks upsetting major importers such as India and China. Secretary of State Michael Pompeo will announce the decision on Monday morning, said the people, who asked not to be identified discussing a plan that hasn’t been formally unveiled. The current set of waivers, issued to China, India, Japan, South Korea, Italy, Greece, Turkey and Taiwan, expire on May 2.

The administration also will announce commitments from other suppliers, including Saudi Arabia and the United Arab Emirates, that will offset the loss of Iranian crude on the market, according to 2 of the people. The decision not to renew the waivers is a victory for National Security Advisor John Bolton and his allies who had argued that US promises to get tough on Iran were meaningless with waivers still in place. Pompeo and his team had been more cautious, though they also had argued that the market was well-enough supplied to ramp up the pressure on Iran.

Bolton and officials in the Energy Department argue that it’s time for the administration to make good on its desire to push Iran’s oil exports to zero. Pompeo’s team, led by Iran special representative Brian Hook, cautioned that a sudden removal of Iranian crude from the market, about 1.1 million barrels a day, could fuel volatility and lead to a price spike.


US 10-year Treasury Yield Fails to Break 2.6% Resistance:

The benchmark US Treasury 10-year yield touched 2.61% last week, the highest since the Fed surprised traders in March by shifting to a more dovish stance. It settled at 2.56%, up from 2.34% on March 28, the lowest since December 2017. Traders are now pricing in a bit more than half of a quarter-point rate reduction this year, whereas a few weeks ago they were ready for more than a full cut.

While the angst over a Chinese slowdown that drove last month’s bond rally has eased, questions linger about the global outlook as malaise in Europe persists. This week brings an update on the world’s biggest economy, with a read on first-quarter US growth that’s expected to be less dire than originally predicted, though far short of a blockbuster.

While first-quarter gross domestic product is forecast to slow to a 2% annual pace, from 2.2% the prior period, it’s hardly flashing a recession signal. At the end of March, economists had predicted output last quarter would stall to 1.5%. Reports on actual and expected inflation, both at the heart of Federal Reserve policy making now, are also on traders’ radar.


Warren Calls for Impeachment of Trump:

Democratic presidential candidate Elizabeth Warren on Friday called for President Donald Trump’s impeachment, saying the country can’t afford to ignore the obstruction uncovered by Special Counsel Robert Mueller’s investigation.

“The severity of this misconduct demands that elected officials in both parties set aside political considerations and do their constitutional duty,” the Massachusetts senator wrote in a series of tweets. “That means the House should initiate impeachment proceedings against the president of the United States.”

Mueller’s report released Thursday identified at least 10 instances of potential obstruction of justice by the president, including discouraging others from cooperating with the Russia probe and dangling possible pardons.

Warren’s impeachment calls comes as House Speaker Nancy Pelosi and her top lieutenants have been trying to tamp down calls from progressive lawmakers in that chamber to begin impeachment proceedings. Up until now, Mueller’s investigation has caused barely a ripple on the presidential campaign trail. Voters rarely mention it in questions to the candidates, and the contenders themselves have focused more on pocketbook issues like wages and health insurance.

Since Mueller’s report was released, several of the Democratic presidential contenders have suggested that impeachment should be under discussion, and some have urged further investigation. Warren’s comments appear to be the most direct call for the House to act.


Chinese Companies Increase Fund-Raising Efforts:

According to Bloomberg news earlier today, China’s cash-strapped companies are going to new lengths to raise money from the booming stock market, even if it comes at a cost to existing shareholders. Nine firms have said they plan to raise a combined 40.5 billion yuan through rights issues since January, almost twice the amount announced all of last year, according to data compiled by Bloomberg.

Chinese companies face restrictions on how much, how often and at what price they can sell new shares through private placements, the hitherto most popular method to raise money via the equity market. That’s sent them on a hunt for alternative funding tools, making the most of this year’s surging risk appetite. A rights issue, while subject to some of the same regulatory hurdles, allows for more freedom on pricing. While companies may also opt to raise funds through a public placement, it’s a tool that’s still rarely used because issuers aren’t permitted to offer big discounts.

The surge in rights issues has underscored the dilemma facing the nation’s leaders as they seek to improve financing conditions for the private sector without jeopardizing the sustained rally in the stock market. The curbs on private placement were put in place in 2017, when new listings were picking up pace, alarming regulators that they may drag down the stock market by adding supply.

Some analysts warn the issuance could be a temporary drag on the equity market. Existing investors with no plans to participate in the offering could prefer to sell their holdings rather than have their stake diluted.


China Signals Less Stimulus:

The CSI 300 Index of equities traded in Shanghai and Shenzhen sank 2.3% on Monday, its biggest loss in a month, after Beijing officials signalled they’re less comfortable about adding stimulus. Property developers led the plunge, along with old economy shares such as banks and industrial companies. The gauge slid another 0.2% at the open on Tuesday.

After the CSI 300 surged almost 40% this year, investors have grown increasingly sensitive to whether the authorities will maintain the massive scale of stimulus seen in the first quarter. A statement late Friday from a meeting of the Politburo was interpreted by traders as meaning the economy is on a stable enough footing that extended support isn’t needed. Instead there was a focus on deleveraging and avoiding speculation in the housing market.

China’s stock market has historically been driven by liquidity and momentum traders and any sense that these may dry up could act as a serious overhang. Equities slumped earlier this month amid concern the authorities would act to slow the increase in leverage in the market. The CSI 300 sank 4% on March 8 after investors took a rare sell rating from the nation’s largest brokerage as a sign that the government was unhappy about the speed of the rally.

The central bank last week gave a signal that supply of cash would be less liberal, when it rolled over only half of the funds coming due through one of its longer-term policy tools, instead offering more 7-day money.


China Debt Woes Grow:

The debt pain engulfing some of China’s big conglomerates has intensified in recent days with more bond defaults, asset freezes and payment uncertainties.

China Minsheng Investment Group Corp. said last week cross defaults had been triggered on dollar bonds worth $800 million. Lenders to HNA Group Co.’s CWT International Ltd. seized control of assets in Singapore, China and the US after the unit failed to repay a loan, according to a filing last night. Citic Guoan Group Co., backed by a state-owned company, isn’t certain whether it can pay a bond coupon due on April 27.

The increased repayment stress sweeping some of China’s biggest corporations is a sign that the liquidity crunch, induced by a 2-year long deleveraging campaign, is far from over despite an improving economy. Bonds from at least 44 Chinese companies totaling $43.7 billion faced repayment pressure as of last week, a 25% jump from the tally at the end of March, according to company and ratings firm statements compiled by Bloomberg.


China’s Belt & Road Initiative Reboot:

Chinese President Xi Jinping’s grand Belt and Road Initiative is getting a makeover to tone down government rhetoric and tighten oversight, after allegations of corruption and a lack of sustainability dogged some of its highest-profile projects.

Beijing is taking a range of steps to exert more control over the program, officials and participants said, including a more muted publicity drive, clearer rules for state-owned-enterprises, restricting use of the BRI brand, and building overseas auditing and anti-corruption mechanisms. It’s also stepping up efforts to get developed nations to join in to spread the risk of building projects in poorer nations and to counter allegations that BRI is just an attempt to build China’s political influence.

As global leaders gather in Beijing this week for Xi’s second Belt and Road Forum for International Cooperation, China is having to defend its image in the light of the trade war with the US and growing concern about Beijing’s political and economic influence in Asia and Europe. Authorities have purged terms in state media and official statements that have driven anxiety of China as a menacing power, from its “Made in China 2025” campaign to the decade-old “Thousand Talents” program to encourage talented Chinese workers living overseas to come back home.

The evolution of BRI also reflects a need to ensure more robust standards expected by developed nations as China works to extend the initiative into Europe. Italy’s announcement this year that it will participate in BRI, the first Group of 7 country to sign up, was a big win for China. But negotiations with other major EU nations face major hurdles over regulations and standards, said a person familiar with the discussions. Stumbling blocks include the request that financing meet the standards of the IMF and EU, the person said, without providing more detail.

Third-party market cooperation, signing up a developed nation to help build infrastructure in one of the Belt and Road countries, is the focus of the next phase of BRI, according to a government official involved in China’s overseas development. This is a way to depoliticize the BRI and China will sign documents with Britain, Switzerland and Austria on this kind of cooperation during the forum, following similar agreements with France, Spain, and Australia, said the person. That official, like other government bureaucrats, did not want to be named because they are not authorized to speak publicly on the matter.


FX Updates:


Spot: 1.3555

USDSGD slipped lower from its 1-month high earlier today, sliding by as much as 0.1% to 1.3556 and adding onto last week’s gains following MAS’s decision to keep its currency policy settings on hold as expected earlier this month. According to a client note from Morgan Stanley, a relatively dovish MAS statement should prevent SGD from appreciating by what’s implied from the SGD NEER current slope of 1%. Further SGD weakness could drive the pair higher to the 1.3614 resistance level, which has been the upper bound of its range over the past 3 months.



Spot: 0.7128

AUDUSD fell earlier today, extending its decline further from its 200-day moving average. The RBA’s minutes from its April meeting were dovish and pessimistic, as officials indicated a rise in rates in the near term was low. A slip back to below 0.7100 is probable.



Spot: 1.3359

USDCAD got rejected at the 1.3400 handle Monday, as the Canadian dollar outperformed all of its G-10 peers after oil rose on reports the US won’t renew waivers that let countries buy Iranian crude without penalty. However, the overall longer-term trend of USDCAD continues to remain to the upside, as it remains comfortably above its 200-day moving average of 1.3201.  



Spot: 6.7130

USDCNH maintained its rebound from the key support level at 6.6737 , adding 0.2% to 6.7122 earlier today. The pair is expected to test its 50-day moving average, currently at 6.7192, in the coming week.



Spot: 111.78

USDJPY was retreated lower from its 112 resistance earlier today, dropping by as much as 0.3% on a stronger yen as Japan investors reduced risk before next week’s Golden Week holidays.



Spot: 1.2987

GBPUSD remained little changed earlier today, holding just below 1.3000 early Easter Monday. The pair continues to maintain above its 200-day moving average of 1.2964, but only just. The Sunday Times has reported the chairman of the back-bench 1922 committee, Sir Graham Brady, is ready to tell the British Prime Minister Theresa May that she has to step down from her position. A break below the 200-day moving average is likely to drive the pair lower towards the 1.2700 region.


Sources: Bloomberg

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UEN: 201419754M

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